Making the important ISA decisions


Those who save regularly will no doubt have an ISA. After all it’s an incentivised form of savings with a number of tax benefits. If you’re serious about saving, it would be foolish not to have one. The majority of ISAs opened in the UK are cash ISAs, however, there is another option on the market; one that potentially earn you a much higher return on your investment; a stocks and shares ISA.

So, if you’re serious about saving you may have considered transferring your existing cash ISA into a stocks and shares ISA, or having the two operate alongside each other. Here are a few reasons why a stocks and shares ISA should form the basis of those important ISA decisions.

What is a stocks and shares ISA?

When you place your savings into a stocks and shares ISA, rather than just enjoying the usual tax benefits of an ISA   and accruing interest tax free, you invest your money into a choice of investments. Cash ISAs for some may seem like a more attractive option as it’s much easier to forecast the return on your savings; whereas when you invest in the stock market anything can potentially happen. This does create a level of uncertainty, but it shouldn’t detract from a much more lucrative option.

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You can also invest twice the amount into a stocks and shares ISA as you can with a cash ISA. For example, for the current tax year the maximum you can pay into a cash ISA is set at £5,640; whereas for a stocks and shares ISA the limit is double £11,280.

What is the standard return on investment for a stocks and shares ISA?

Figures released by HM Revenue & Customs relating to the tax year 2009/10 revealed that investors who put £5,100 into a stocks and shares ISA during the year, would have enjoyed a return of £593 before charges. Those invested the same in a cash ISA would have received a return of just £145. Clearly, this is a much more lucrative investment option.

What are the potential range of investments for a stocks and shares ISA?

When choosing a stocks and shares ISA, not only should you be investigating the best ISA rates offered by the various providers on the market you also need to understand the potential range of investments on offer.

The best providers offer a complete range, including the following:

* Stocks and shares
* Government bonds
* Corporate bonds
* Investment trusts
* Exchange traded funds / commodities
* Permanent Interest bearing shares (PIBS)

What are the tax benefits of a stocks and shares ISA?

Investments held within an ISA work in the same way as they would outside an ISA. What this means is that an ISA investment in a fund or share will leave you holding the same investment as if you bought it outside the ISA. However, the biggest benefit of investing in this manner is that there is no further Capital Gains Tax or income tax if you decide to sell the investments, of if you choose to take an income through your ISA you won’t need to pay any income tax.

Is a stocks and shares ISA right for me?

If you’re serious about your savings, a stocks and shares ISA is right for you. Pick your investments wisely and keep your funds within the ISA for as long as possible and you could potentially reap the rewards.